- By Eric Folkemer, Head of Nasdaq Private Market
The private market landscape continues to change, especially amid the recent COVID-19 pandemic. Public market volatility, as well as evolving regulatory and reporting requirements, have raised the barrier to entry to the public market, leading more private companies to pursue secondary programs to return value to investors and employees.
Since Nasdaq Private Market’s inception in 2013, we have executed 350 liquidity programs for 230 private companies, and that number keeps growing. We’ve also seen the private market substantially evolve as more companies are staying private longer, driving increased demand for liquidity and capital returns.
Our annual retrospective report, which was based on our analysis of 2019, uncovered some fascinating trends that have emerged over the past year. While it will be interesting to see if more developments transform the marketplace in 2020, we believe these are the four key trends to watch in the private secondary market.
1. More Companies May Seek Liquidity in the Second Half of 2020
If the trends we identified from 2019 had continued into 2020, we would have expected more activity from early-stage startups so far this year. With the current COVID-19 pandemic crippling economies, we believe there will be unforeseen changes to the types of companies running liquidity programs in the second half of the year.
Historically, Nasdaq Private Market has served late-stage companies, but early-stage companies comprised most of the liquidity programs we executed in 2019. Nasdaq Private Market last year facilitated a record 87 company-sponsored secondary programs, including 48 tender offers and 39 repurchase programs. Over 50% of all venture-backed companies partnered with Nasdaq Private Market before going public in 2019.1
More early-stage companies seeking liquidity for the benefit of employees and early investors have used these events in part as a retention strategy to keep the best talent and retain their competitive advantage. In 2019, Boston-based technology company Klaviyo accomplished this with its repurchase program, using the proceeds from its Series B funding round to repurchase shares from employees. Some employees we interviewed mentioned that the repurchase program helped them to pay off student loans or purchase their first home.
Whether your company is in the early stage or later stage of its private company lifecycle, now may be the appropriate time, if your team is in a position to do so, to consider what a liquidity event could look like.
2. Private Companies Are Likely to Stay Private Longer
In today’s market climate, private companies are delaying their secondary transaction plans and in some cases, re-evaluating their IPO plans. More private companies may stay private longer for several reasons, such as the impact of COVID-19 on normal operations; identifying the right talent to take the company to the next level; reporting requirements may still be daunting and expensive; you may not need to, etc. Delaying an IPO allows them to avoid evolving economic pressures in the public market that may reshape their business strategy and private companies face fewer reporting requirements. Staying private also enables these companies to maintain more control, take more calculated risks, and pursue more innovation.
In 2019, more private companies considered a direct listing instead of a traditional IPO, according to our research. In a direct listing, price discovery is market-driven; as companies move forward on the path to listing, an important consideration is to offer an active secondary market in their shares in order to create market activity and to provide multiple benchmarks for advisors to set the reference price..
The fragmentation and opacity in the private markets can be challenging for private companies seeking a simpler approach to liquidity and price discovery. Nasdaq Private Market simplifies the process under one centralized continuous trading platform, providing transparency, regulatory oversight and structured technology. With our automated settlement solutions, we offer real-time consolidated trading data. Our continuous platform provides the company and its investors with a pulse on market supply and demand, helping to drive activities towards a stronger price benchmark or reference price for day one of the listing.
As private companies consider the right path to a public listing, Nasdaq Private Market can consult with your executive team on various liquidity solutions, from single episodic tender offers to pre-listing continuous trading solutions.
3. Frequency of Liquidity Events May Increase
Given that private companies are increasingly looking to secondaries to provide liquidity, we would have expected an even higher frequency of transactions this year. Companies may still have an eye towards liquidity; however, we believe that these events will be pushed to the second half of 2020. Since these events can take time and effort to plan, it may be worth reviewing the structure of a future event now and consulting with Nasdaq Private Market on the timing and execution.
Last year, Nasdaq Private Market saw that more companies launched a liquidity program after a recent capital raise. In 2019, 63% of companies completed a liquidity program within four months of a financing round, up from 50% in 2018. Also, more returning clients partnered with us to execute their liquidity strategy. Forty-three percent of our customers were repeat clients in 2019 — the highest percentage in the last four years.
Many of our clients pursued liquidity to reduce dilution and to respond to shareholder demand. It was also easier to execute liquidity events thanks to carefully vetted institutional buyers and a modern technology platform that offers competitive price discovery and real-time access to data while maintaining a high level of confidentiality and regulatory compliance. With all these mechanisms in place, pre-IPO companies can confidently and cost-effectively achieve their liquidity goals.
4. More Capital May Enter the Market
Although current market uncertainty has negatively impacted the secondary market, we believe that the typical buyer in a private market secondary transaction is optimally positioned to deploy capital when private companies’ appetite for liquidity events returns. As the markets return to some level of normalcy, we believe that secondary activity will increase exponentially with buyers ready to put their capital to work since they still hold record levels of dry powder.2,3
A 2019 Goldman Sachs report indicated that, at the time, with more capital entering the private market, companies might generate more value by delaying an IPO. The report notes that increased venture capital investment is driving larger funding rounds leading to more capital flooding into the private market. In 2020, we believe that other industry players beyond mega-funds like Softbank may drive large funding rounds with new buying opportunities in the market.
The Future of the Private Secondary Market
2019 was a banner year in the private market, as Nasdaq Private Market helped both early- and late-stage companies achieve their liquidity goals. In 2020, during this challenging time of uncertainty in the markets, we continue to see an active, albeit slowing, secondary market. As private companies take a step back to evaluate the timing of their liquidity programs, Nasdaq Private Market remains ready to help them meet their liquidity needs, whether a tender offer or share repurchase, option repricing or block sale. We believe the private secondary market will continue to grow, providing more opportunities for private companies to access liquidity while continuing to drive growth outside of the public market.
Want to get more perspectives on the secondary market? Visit www.nasdaqprivatemarket.com to download the Secondary Market 2019 Retrospective Report and infographic.
1. Nasdaq internal data sources. Excludes healthcare industry.
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